GRIT ALPHA: War Dogs

Hi everyone! Welcome to this week’s edition of the GRIT ALPHA newsletter! 👋 Read to the end for a special update about our upcoming Small-Caps Investing Course!

War Dogs

On the top of most investors’ lists of concerns for 2024 was geopolitical risk.

It’s no secret by now that trends of deglobalization (onshoring) are accelerating along with more drastic polarization between the left and right within nations.

Globally, more voters than ever in history will head to the polls in 2024 as at least 64 countries (plus the EU) are meant to hold national elections. This represents a combined population of about 49% of the world's population.¹

We already had Taiwan’s election, as the pro-independence party remained in power by a slim margin, further escalating tensions between China vs. The US and Taiwan. The all-important US election will take place on November 5, so we’ve got quite a wait until we get more fireworks.

When it comes to tensions, we already have the Houthi Rebels in Yemen blocking a vital shipping passage in the Red Sea, as well as the Russia/Ukraine and Hamas/Isreal conflicts ongoing.

Now, I want to clarify that I am not pro-conflict in any way, shape, or form; rather, I am trying to understand the shifting supply/demand dynamics, which is an exercise to do so.

Five themes that I am watching around raising geopolitical tensions are:

1. Shipping Companies: We saw a familiar chart resurface on the back of the blockage of the Red Sea passage, the Shanghai Shipping Index. The most relevant route to look at is the Shanghai to Rotterdam Freight Benchmark:
   

   

   Source: Bloomberg

   
   Costs have spiked over 250% as a result of the conflict. Around 12-15% of global trade travels through the Red Sea. Shipping companies have been forced to alter their routes, increasing journey times and increasing freight rates. Ripple effects could flow through to more stubborn inflation readings if a resolution doesn’t happen soon.
   
   Stocks to watch: Maersk, Hapag-Lloyd, Danaos. ETFs like Breakwave Dry Bulk Shipping ETF (BDRY), SonicShares Global Shipping ETF (BOAT), and U.S. Global Sea to Sky Cargo ETF (SEA) have seen a boost.

2. Shipping Insurance Companies: Shipping companies have rerouted their vessels via alternative routes, like the Cape of Good Hope, which adds considerable distance and time to journeys. This rerouting has resulted in higher fuel bills and increased insurance premiums.
   
   Stocks to watch: While many marine-specific underwriting companies are private, you can still get exposure to the entire supply chain financing network beyond just marine through Allianz.
   

3. Commodities: War significantly impacts commodity markets, often leading to price surges. We recently saw plenty of volatility around the Russia/Ukraine conflict, as these two nations are major energy exporters of fertilizers and grains. Conflict leads to embargoes, destruction of production capacity, and disrupted supply chains.

   
   Stocks to watch: ETFs like United States Oil Fund LP (USO), Invesco DB Oil Fund (DBO), ProShares K-1 Free Crude Oil Strategy ETF (OILK), and United States 12 Month Oil Fund LP (USL).
   

4. Semiconductor Manufacturing: Taiwan is home to the world’s most important semiconductor company, TSMC. Taiwan’s recent election reinstated the pro-independence party, which escalated tensions with China, as Xi recently proclaimed “reunification was inevitable.” With the US taking a hardline on trade vs. China, any reunification of Taiwan would disrupt this ecosystem.
   
   Stocks to watch: Taiwan Semiconductor Manufacturing, ASML Holding, Applied Materials.
   

5. Defense: Conflict increases the demand for military equipment and defense services. While these stocks typically have numerous other use cases for technology, there’s nothing wholesome about buying these companies. I prefer to steer clear of these names, but it’s important to understand their impact on funding wars.
   
   Stocks to watch: Northrup Grumman, L3Harris, Lockheed Martin, iShares U.S. Aerospace & Defense ETF (ITA), Invesco Aerospace & Defense ETF (PPA), and SPDR S&P Aerospace & Defense ETF (XAR).

While the business of conflict is not a pretty one, it is still very important to understand the supply and demand dynamics that will come to light under geopolitical events.

Cheers,

The GRIT Alpha Team

Sources:

[1] The Ultimate Election Year: All the Elections Around the World in 2024 (December 2023): https://time.com/6550920/world-elections-2024/

Grit is a publisher of financial information, not an investment advisor. Grit does not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient. Grit does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN. INVESTORS SHOULD OBTAIN INDIVIDUAL INVESTMENT ADVICE BASED ON THEIR OWN CIRCUMSTANCES BEFORE MAKING AN INVESTMENT DECISION

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

The author, publisher or insiders of the publisher may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and Grit undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

Grit does not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any related social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

Grit publishes content through Beehiiv, an email newsletter platform and operates the websites Gritcap.io and and social media accounts (including but not limited to): Instagram, Twitter, Linkedin, TikTok, YouTube, SnapChat, Facebook and Threads. By accessing Grit’s content, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof or any of Grit’s content. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website or Grit constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors ONLY who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.

Please read: Terms of Use, Privacy Policy, Disclosure Policy, State Disclosure Policy, and Disclaimer Policy

If you have any questions please contact us at [email protected]